Businessweek Archives

German Carmakers In The Fast Lane

April 12, 1998

The Corporation: RIVALRIES

GERMAN CARMAKERS IN THE FAST LANE

Mercedes and BMW are gunning for U.S. luxury-car rivals

The U.S. luxury-vehicle market has pretty well stalled these days. Sales are expected to grow a scant 4% over the next two years. But around the New Jersey offices where both Mercedes-Benz and BMW have their American headquarters, optimism reigns. Flush with success from record sales in 1997, the German auto makers are loading up for a product blitz. Mercedes has a flashy new convertible, a souped-up version of its M-class sport-utility, a revamped line of large sedans, and maybe a luxury minivan on the way. BMW is gearing up for the launch of a new version of its popular 3-series sedans this fall, and has a hybrid sport-ute debuting in 1999. "We're going to keep pushing, no matter what," says Victor H. Doolan, president of BMW of North America Inc.

The swagger is back at BMW and Mercedes. It has been a remarkable dual turnaround for the German companies, whose U.S. sales hit rock bottom in 1991 in the face of a successful onslaught by Japanese luxury brands. But they have since left rivals behind in the slow lane. Bolstered by a stable of new products and aggressive marketing campaigns, BMW and Mercedes again rank as the hottest luxury brands in the U.S.

Indeed, both BMW and Mercedes have plenty of room to boast. They ended 1997 in a dead heat for preeminence among luxury import brands, with BMW's sales of 122,500 vehicles edging out Mercedes' 122,417. And in a luxury-car market that grew just 6% from 1991 to 1997, BMW sales soared 130%, while Mercedes rose 83%. That has allowed the German brands to leapfrog past their top two Japanese rivals, Lexus and Acura.BACKLASH. What's more, if BMW and Mercedes keep accelerating, they could roar past the faltering U.S. market leaders, General Motors' Cadillac Div. and Ford's Lincoln unit, within the next five years. "Cadillac and Lincoln are definitely on the defensive," says Susan Jacobs, an independent auto analyst in Rutherford, N.J. Lincoln's car sales slipped 1% last year, to 139,540. Even with an all-new entry-level car, the Catera, Cadillac's sales rose just 7%, to 182,624. Lincoln is bringing out a small luxury car this fall, and Cadillac is banking on a redesigned DeVille in 1999. But few expect those additions to be strong enough to slow the Germans' momentum.

Competitors now hold Mercedes and BMW up as the standard to beat. "They have clearly reframed the luxury market," says John F. Smith, general manager of GM's Cadillac Div. "I think they've been much more responsive to a variety of consumer tastes." That's just the opposite of the reputations BMW and Mercedes carried at their low point in 1991. Back then, the pair admittedly lost touch with consumers. They paid the price: Sales bottomed out at 53,343 vehicles for BMW and 58,869 for Mercedes--down 45% and 41%, respectively, from their high five years earlier. "The key issue then was to survive," says Michael Jackson, president of Mercedes-Benz of North America.

BMW suffered, in part, from a backlash against its yuppie image of the 1980s, when "Beemers" were the car of choice for nouveau-riche stockbrokers and investment bankers. They were known for performance, style, and such expensive maintenance that the brand's nickname was Break My Wallet. "The quality was always good, but maintenance was a huge issue," says Steve Thomas, a BMW dealer in Camarillo, Calif. "You'd spend $40,000 for the car, and a couple of thousand dollars a year to keep it on the road." Mercedes, on the other hand, was known as safe, reliable, exceptionally well-engineered--and dull.

In other words, both companies were ripe for the picking. That's exactly what the Japanese auto makers set out to do, starting with Honda's Acura brand in 1986 and followed by Toyota with Lexus and Nissan with Infiniti in 1989. The Japanese luxury models had fresh styling, topped the quality charts, and were priced significantly lower than the competing BMW and Mercedes cars.

The way consumers flocked to the upstarts humbled the Germans. "We thought we couldn't be touched by them, that we were superior," says British-born Doolan, who joined BMW 20 years ago and has headed its U.S. sales operations since 1993. "There was a degree of complacency, maybe even arrogance." The attack came as the dollar was falling against the German mark, pushing up prices of BMW and Mercedes models. When Toyota introduced its LS 400 for $35,000 in 1989, the cheapest BMW 7-series sedan cost $55,000, and a Mercedes 300SE sold for $56,000. "Certainly, the Japanese did their homework, and we were vulnerable," says Jackson, a former Mercedes dealer who became president last year. "We had to change."

Their problems were all too apparent: bloated prices, antiquated dealer networks, and, most important, a lack of hot new cars. Both slashed prices across the board on existing products and held down costs on new models by opening their first assembly plants in the U.S. They pressured dealers to catch up to Lexus' standards for sales and service. BMW started a program that covered routine maintenance for a three-year period, for example.

The toughest challenge was to energize the tired lineups. Mercedes brought out two new C-class midsize sedans in 1994 and followed up with redesigned E-class full-size sedans and wagons two years later. Both new models were sportier, without a matching price hike. Mercedes ventured further into new territory last year with the SLK two-seat roadster and the CLK luxury coupe.

An even bigger gamble came with the introduction last year of Mercedes' first-ever sport-utility vehicle, the M-class, built at the company's new factory outside Tuscaloosa, Ala. It has been a runaway hit, with 21,000 vehicles sold in the first six months. Sometime later this year, Mercedes execs will decide whether to stretch their brand even further, to cover a uniquely American product--a luxury minivan.

BMW has matched Mercedes product for product. It radically redesigned the 3-series sedans in 1991 and made them more affordable to younger buyers. Currently, it offers seven versions of 3-series models, ranging in base price from $21,960 to $42,070. Another update set for this fall has already received rave reviews from the automotive press. BMW also rolled the first Z3 roadsters out of its new Spartanburg (S.C.) factory in 1996. And next year, BMW will introduce a "sports-activity-vehicle," described as a hybrid of an SUV and a performance sedan.CACHET. Even as the Germans improved, they got a big break from an unexpected corner: Toyota and the other Japanese carmakers seemed to forget what had put them on the map in the first place. Lexus, for example, hit the market initially with less-expensive cars that mimicked Mercedes styling. But as Mercedes and BMW got nimble and held down prices, Lexus and other Japanese brands hiked prices to boost profits and promptly lost their edge. They have since tightened their belts by freezing and, in some cases, cutting prices.

But those moves have come too late to prevent BMW and Mercedes from recapturing the hearts of many luxury buyers with their new lineups. Don Busse, an engineer from Port Hueneme, Calif., recently traded in an Acura CL for a BMW Z3. "The Z3 is more sporty, more fun," says Busse. "BMW also has more cachet than a Japanese brand, or a Lincoln or Cadillac."

That's a message the German pair is also trying to hammer home in their advertising. In a new Mercedes ad campaign featuring its SUVs, for example, actors dressed as executives and engineers sing and dance to a 1950s-era rock beat. "I love my Benz now," croons an Elvis-like exec. The one-word tag line? "Fun." So far, the message seems to be resonating with Mercedes buyers. "It's the most reliable car on the road, but its image is hipper than before," says Kim Adams, a TV newswoman from Marlton, N.J., and owner of a C-class sedan.

Of course, the German competitors are not doing everything in lockstep. As their rivalry has intensified, executives of both Mercedes and BMW have begun to snipe at the other's accomplishments. Before a speech in Detroit in January, Jurgen E. Schrempp, chairman of Mercedes' parent Daimler Benz, suggested that BMW may have manipulated its 1997 U.S. sales figures to beat Mercedes' numbers. "They reported their sales after us, right?" Schrempp said with a smile. "The point is, if we say our sales were 122,780, they would say they had 122,781." Retorts Doolan: "If it's a sales race, let's make it a level playing field. If we include [BMW-owned] Land Rover trucks, we beat them 144,000 to 122,000."

And even as the Germans enjoy their resurgence, rivals are hardly giving up. GM's Cadillac unit is entering the luxury sport-utility fray with the Escalade, due out this fall. Lincoln will court baby boomers--and potential C-class and 3-series buyers--with its own midsize luxury cars, the LS6 and LS8. The so-called Baby Lincolns come out this fall, with expected price tags around $30,000.

So far, the Japanese brands have yet to mount an effective response. Lexus is bringing out a carlike SUV called the RX300, aimed directly at the M-class. In a market that's largely product driven, however, more will be needed. "The Japanese counterpunch hasn't occurred yet," says John Casesa, an auto analyst with Schroder & Co. in New York.

With the market expected to slow, however, virtually all the luxury brands are holding the line on price hikes. That means competition is likely to get a lot tougher. But the German duo is expected to continue to grab new buyers. "BMW and Mercedes are riding the wave right now," says Lincoln Merrihew, an analyst with J.D. Power & Associates in Agoura Hills, Calif.

Mercedes and BMW executives vow that complacency will never creep into their companies again. Still, the surge in sales will level off, says Dieter Zetsche, a managing director of Daimler Benz. "You will not see continued 30% growth rates," he says. Helmut Panke, a BMW managing director, agrees. "When you get to the top of Mt. Everest, you have to take a deep breath," he says. For two companies that have been to the brink, it's remarkable enough that they're on the top, looking down.By Bill Vlasic in DetroitReturn to top